Journal Article

Internal Rate of Return Estimation of Subsidised Projects: Conventional Approach Versus fuzzy Approach

Fiala, Petr, Hašková, Simona

2023

Overview

This paper addresses the internal rate of return (IRR) assessment of subsidised production. The difference between the result of IRR calculation and the reality can be largely attributed to uncertainty about the future market price and demand. Thus, in the IRR model the intervals of possible input values instead of uncertain point values should be taken into account. Within the intervals of the input values there is no relevant reason to prefer one value over another. The fuzzy approach is applied to decide whether or not the system of subsidies is adequate in terms of IRR. It leans on the “fuzzy numbers”, which are generalisations of real numbers within the meaning of not referring to a single value but rather to intervals of possible values. The results are then compared with the conventional statistical approach of IRR single-value evaluation. The analogy between the conventional statistical and fuzzy approach is shown on the theoretical level. The practical contribution of this paper lies in the IRR assessment of a subsidised electric car production project. Two scenarios of possible project development are considered. In the study, we derive the algorithm to calculate the average probability of the appearance of the subjectively expected IRR, which is compared with the minimum required profitability. We show that the IRR evaluation of the subsidised production should not be underestimated. The need to verify the adequacy of a subsidised project by a proper tool is given by the fact that many investors mistakenly believe that subsidies will ensure the required profitability. The use of statistical methods in a state of uncertainty can lead to misleading results. The fuzzy analysis offers the investors involving the subjective risk in their decision making more benefits and brings more information compared to statistical approach.

• Publisher: Springer Nature B.V
• Subject: Adequacy / Algorithms / Averages / Decision analysis / Decision making / Economic development / Electric vehicles / Internal rate of return / Intervals / Investors / Production / Profitability / Profits / Project development / Rates of return / Real numbers / Statistical analysis / Statistical methods / Statistics / Subjectivity / Subsidies / Uncertainty / Value